Project Jasper is an experiment being done by the Bank of
Canada, Payments Canada and R3 to test the viability and
feasibility of using Distributed Ledger Technology
("DLT") as the basis for wholesale
interbank payment settlements. This project was launched in March
2016 and has completed two phases. Phase 1 of Project Jasper
employed the Ethereum platform as the basis for the DLT, while
Phase 2 employed the custom-designed R3 Corda platform. In June
2017, the Bank of Canada issued a report on its preliminary findings from
Project Jasper, which were summarized in our
previous article. On September 29, 2017, the Bank of Canada,
Payments Canada, and R3 released a white paper outlining their detailed findings
from Project Jasper. This article elaborates on our previous
article based on the findings from the white paper and discusses
the next steps for Project Jasper.

Key Merits and Considerations of Project Jasper

End-to-End Settlement

Project Jasper was premised on the idea that payment settlement
is the final leg of most economic transactions, but also that other
areas of the contract chain have the potential to be supported by
DLT. For example, "smart contracts" can be used to codify
the terms and conditions of an agreement and can be automatically
executed once certain conditions are met. Based on the experience
from Project Jasper, the primary benefit of a DLT interbank cash
payment platform would be an "end-to-end" settlement,
meaning that the DLT arrangements for payment settlement would be
aligned with other DLT arrangements within the same economic
contract.

Settlement Risk

Principle 8 of the Principles for Financial Market
Infrastructures ("PFMIs") requires that
a settlement must be final and irrevocable. Settlement finality in
Phase 1 was "probabilistic" because of the possibility
that a payment could fail to remain in the blockchain and be
recorded under a proof-of-work consensus. To address this and
improve settlement finality, Phase 2 introduced a notary node to be
managed by a trusted third party. The Bank of Canada served as the
notary node and was responsible for confirming the uniqueness of a
transaction to avoid double spending. The second requirement under
PFMIs is that there be a full and irreversible transfer of an
underlying claim in central bank money. To meet this, Project
Jasper created a digital depository receipt
("DDR") as a digital settlement asset,
which represented a claim to central bank deposits. The strength of
the legal basis for settlement finality remains to be tested.

Operational Resilience and Efficiency

Project Jasper used a "permissioned" DLT, meaning that
only those approved could use the exchange. This allows regulation
of users and allows consensus to be achieved more quickly than with
a public ledger. DLT solutions can also reduce the number of errors
and duplications compared to the incumbent, manual systems in
Canada because parties are required to reach a consensus before a
transaction is posted. However, due to the limited implementation
of the project, it is difficult to assess whether DLT is more
operationally efficient than the current system.

The white paper also considered the operational resiliency of
Project Jasper and noted the following:

Capacity

Phase 1: The maximum
processing capacity was 14 transactions per second, which is
similar to incumbent systems, meaning there are constraints for
future volume increases.

Phase 2: There is
capacity for volume increases, in part because only the transacting
parties, a supervisory node and the notary node are required to
validate and record transactions (vs. the requirement for majority
consensus in Phase 1).

Availability and
Cost

Phase 1: The
proof-of-work consensus allows for high availability at a lower
cost. This is because of the sharing of databases across all
participants in the proof-of-work consensus and the back up of
ledgers by all participants.

Phase 2: To increase
data privacy, each participant had a proprietary ledger. This
creates challenges for data replication across the network.

Risk

Phase 1: The
consensus protocol requires agreement of a majority of R3 members,
meaning there could not be a single point of failure.

However, this does not eliminate the
need for participants to back up their data. Due to the
confidentiality of the information, in the event of a failure,
participants would be unlikely to share data.

Phase 2: Both the
notary and supervisory nodes are needed for consensus, therefore
increasing the risk of a single point of failure. To mitigate this
risk, participants will need to back up their data.

Potential Applications & Benefits of DLT to the Payments
Industry

Reduction of Disputes and Errors

A single payment or file transfer can involve many participants,
and therefore may be recorded by multiple financial institutions.
This can lead to errors and duplication, and inevitably, disputes.
DLT technology requires multiple parties to reach an agreement on
the legitimacy of a transaction before it can be posted. While this
is a recognized benefit of DLT, the overall operational efficiency
of this benefit compared to the incumbent system has not been
measured.

Improved Back-Office Efficiency

After the parties reach a consensus, a single record of the
transaction is recorded. This eliminates the need for internal
record keeping of each party. Project Jasper found that DLT is not
necessarily more efficient on a domestic level than the current
LVTS system, however the analysis did not account for the
back-office work that might be avoided by the individual financial
institutions if DLT is used. Significant resources are expended in
back-office reconciliations; therefore there may be significant
cost savings that have not yet been considered.

Regulatory Compliance

DLT has the potential to assist with regulatory compliance,
particularly with anti-money laundering
("AML") and anti-terrorism financing
("ATF") regulations for cross-border
transactions where counterparty risk can run high. In the current
system, false positives in relation to AML/ATF are a problem as
they can take weeks or months to resolve. DLT has the potential to
allow for easier reconciliation of such payments in order to
legitimize a transaction because of the trusted ledger created.
These benefits could extend to other regulatory compliance as
well.

Transparency vs. Privacy

In the traditional clearing and settlement process, there is a
central database. The DLT used in Phase 2 allows for privacy
between the financial institutions, with each only being able to
view their own proprietary ledgers. However, those with the
supervisory or notary nodes can view all transactions and therefore
have the ability to monitor and perform the traditional function of
a central database. In Phase 2, the Bank of Canada held the
supervisory and notary nodes.

Improved Automation through use of Smart
Contracts

As previously discussed, significant benefits can be obtained
where DLT can be used for end-to-end settlement through the use of
smart contracts. The solution system created by Project Jasper
could be the basis upon which other DLT platforms can be built for
a variety of transactions, such as the settlement of financial
asset transactions, managing syndicated loans, and supporting trade
finance.

Conclusions from Phase 1 and Phase 2

The key conclusions from Phase 1 and 2 of Project Jasper are
that DLT platforms that employ a "proof-of-work"
consensus protocol, as used in Phase 1, do not deliver the required
settlement finality and low operational risk. While Phase 2 was
able to address improvements in settlement finality, scalability
and privacy, it did not adequately address operational risks
requirements. Further evaluation and enhancements will need to be
done to satisfy PFMIs. On a global scale, the white paper
recommends that the focus should be on developing protocols for
interoperability between DLT platforms.

Overall, Project Jasper is an example of the benefits of
collaboration within the payments industry. Such collaboration is
particularly conducive in the concentrated Canadian financial
industry. This collaboration is being extended for Phase 3.

Phase 3

On October 17, 2017 Payments Canada, the Bank of Canada and TMX
announced the third phase of Project Jasper.
This phase will build on the first two phases and involve
developing a proof of concept for the clearing and settling of
securities. Phase 3 hopes to explore an end-to-end settlement
process by integrating the securities and payment infrastructure
and the ability to settle multiple assets on the same ledger. The
objectives of this phase are to reduce the cost of securities
transactions, increase efficiency, and reduce settlement risk. The
results of this phase are expected to be released at the Payments
Canada Summit in May 2018.

For more information about our firm's Fintech expertise,
please see ourFintech group's page.

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